Lead Story: ‘A relatively earnings-driven year’

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ASIAN stocks are expected to be back in favour next year, with a fairly positive outlook relative to global performance, according to Nomura International (Hong Kong) Ltd managing director and chief Asia equity strategist Michael Kurtz.

“The overall outlook [for Asia-Pacific ex-Japan] for the full year is relatively positive. We believe that there will be a 10% upside in 2015. US stocks may see only a 6% or 7% upside next year,” Kurtz, who is also Nomura’s head of global equity strategy, said in an economic and equity outlook briefing here last week.

“For the region overall, we are looking at an 11% earnings growth in 2015. That should deliver us the 10% upside for Asian stocks. It will be a relatively earnings-driven year in 2015,” he added.

India and Taiwan are two of Nomura’s favourites for next year, and it is “overweight” on them.

“Both of them are downstream economies that will benefit from lower commodity prices. Taiwan will benefit from the ongoing US recovery because of its export-driven economy,” said Kurtz.

One factor to consider is the expectation that the US Federal Reserve will raise short-term interest rates next year. Nomura expects this to come in the third quarter (3Q) of next year.

“We think that dividend plays are coming to an end in terms of their outperformance in the equities space,” Kurtz said, citing an inverse relationship between dividend-yielding stocks and US treasury bonds as a proxy for higher interest rates.

Kurtz: The overall outlook [for Asia-Pacific ex-Japan] for the full year is relatively positive .

Nomura has thus underweighted dividend-yielding but low-risk markets such as Hong Kong and Australia for 2015. It is “neutral” on the rest of Asia. “We have no strong enthusiasm for Malaysia in 2015, but it is not ‘underweight’,” Kurtz said.

Meanwhile, he sees a gradual moderation in China’s gross domestic product growth and this will have a large impact on the region.

“We believe China is in the process of a multi-year slowdown. It may slow down to 7% or less,” said Kurtz. In 3Q this year, the world’s second largest economy grew only 7.3%, the slowest since 2009.

This, coupled with the Fed raising interest rates, will prevent markets from experiencing price-earnings expansion, he said.

Double whammy from US and China

With China’s slowing growth and the strengthening of the US dollar, commodities and oil do not have much to cheer about in terms of prices.

“We think this will push commodity and oil prices downwards … We think this is not a short-term softness in energy prices,” Kurtz said.

The US dollar has made a sharp turn upwards, gaining some 4.45% against the ringgit since end-November, to a high of 3.4955 last Friday. This means that the ringgit has depreciated 11% since the 3.1463 peak on Aug 27.

Oil prices, on the other hand, have slumped 45% this year from over US$115 per barrel on June 19, the year’s high, to a 52-week low of US$63.34 last Friday.
“Indonesia and Malaysia get a bit of a headwind from the decline in commodity prices,” said Kurtz.

The two nations are the world’s largest producers of palm oil, with Malaysia contributing some 20 million tonnes and Indonesia 30 million tonnes this year.

Earlier in the year, crude palm oil prices plunged 33%, from a 52-week high of RM2,885 per tonne to a low of RM1,929 per tonne. CPO has since regained some steam, settling at RM2,178 last Friday.

For Malaysia, the outlook could be twice as bleak as the bulk of the government’s revenue comes from oil production. Last year, oil contributed 31% to the government’s revenue of RM220.4 billion.

“Taking a big picture view, it’s difficult to say that Malaysia really benefits from lower oil prices, both in terms of fiscal revenue and overall economic prospects. In our view, lower commodity prices make life more difficult for the regional economy and make top-line revenue forecasts more difficult for Malaysian companies to meet or exceed,” said Kurtz.

Nomura forecasts that Malaysia’s earnings growth will come in at 2% next year and sees no re-rating catalysts for the market.

“Most of Malaysia’s exports are of the wrong kind or go to the wrong economies — China, Singapore and Australia. We don’t see Malaysia as particularly leveraged to the areas of global demand growth that will drive earnings up for other markets in the region, like Taiwan for example,” said Kurtz.

For the first 10 months of this year, Malaysia’s exports grew 7.3% to RM634.75 billion, according to the Department of Statistics.
That being said, Kurtz noted that Malaysia’s fiscal concerns are dramatically overdone.

A point to note is that the government’s revenue is budgeted based on oil prices of US$100 to US$110 per barrel, compared with the roughly US$63 per barrel it is now trading at.

“US$60 per barrel is a reasonable downside target, amid oversupply concerns,” said Kurtz. But he suggested that investors avoid the upstream oil and gas sector for now.

“The time to go long on oil and gas stocks is only when prices stabilise, probably at the earliest in 2Q2015. This [stabilisation] will be driven by the acceleration of the US economy and some curtailment of global [crude oil] supply as the decline in prices takes out certain production centres.”

This article first appeared in The Edge Malaysia Weekly, on December 15-21, 2014.